Corporate bond sales declined at the fastest pace in threemonths and relative yields climbed as concern that Greece wouldexit the euro and accelerate the European financial crisis loweredrisk appetite in the U.S.

Kellogg Co., the Battle Creek, Michigan-based cereal maker,raised $1.45 billion in a three-part issue at its lowest coupons onrecord, according to data compiled by Bloomberg. Canada's InmetMining Corp. sold $1.5 billion of bonds in its first U.S.offering.

Sales totaled $13.4 billion this week, a 55 percent drop fromthe five days ended May 11 and the biggest decline since Feb.17.

Borrowing is falling even with Treasury yields approachingrecord lows, as unease over Greece mounts after elections failed toproduce a new government. Europe's crisis is exposing the“diminishing functionality” of the global financial system,according to Royal Bank of Scotland Plc's Edward Marrinan.

“The markets have become used to alternating rounds of risk-on,risk-off behavior,” Marrinan, macro credit strategist at RBS inStamford, Connecticut, said in a telephone interview. “The erraticconditions are a broader sign of the intractable problems facingEurope.”

Yields on U.S. company bonds increased to 4.28 percent, thehighest level since April 17, and down from 4.81 percent atyear-end, according to the Bank of America Merrill Lynch U.S.Corporate & High Yield Index. The figure rose by 9 basis pointsfrom last week. A basis point is 0.01 percentage point.

'Very Weak'

The extra yield investors demanded to own corporate bondsinstead of similar-maturity Treasuries increased to 304 basispoints, the highest since Feb. 3, and an 18 basis-point rise fromMay 11, the data show.

“The market is very weak,” Marc Gross, a money manager at RSInvestments in New York who oversees $3 billion in fixed-incomefunds, said in a telephone interview. “Nobody wants to bring dealsif you can avoid it. There aren't a lot of companies that aredesperate for money.”

Companies sold $9.57 billion of dollar-denominatedinvestment-grade debt this week, compared with $22.2 billion a weekearlier and 76 percent less than the week ended May 20 2011,Bloomberg data show.

High-yield, high-risk issuance dropped 48 percent this week to$3.8 billion, Bloomberg data show. Average yields increased to 7.75percent, the highest level since April 13, according to the Bank ofAmerica Merrill Lynch U.S. High Yield Master II Index. High-yield,or junk, bonds are rated below Baa3 at Moody's Investors Serviceand BBB- by Standard & Poor's.

“Secondary market liquidity is declining, volatility isincreasing, and risk-free assets, particularly Treasuries, arenearing all-time lows,” Marrinan said.

The 10-year Treasury yield decreased to 1.73 percent from 1.84percent last week, compared with a record low of 1.67 reached inSeptember, according to Bloomberg Bond Trader prices.

“From the issuer's perspective, such low-risk free rates presenta great opportunity,” Marrinan said. “On other hand, such low ratesspeak volumes about the anxiety market participants are feelingabout Europe's problems.”

Kellogg, the maker of Rice Krispies and Pop Tarts, sold $350million of 1.125 percent three-year bonds that yielded 80 basispoints more than Treasuries, $400 million of 1.75 percent five-yeardebt at 115 basis points more than benchmarks and $700 million of3.125 percent 10-year notes with a 145 basis-point spread,Bloomberg data show. The coupons were the company's lowest onrecord for each maturity.

High-Yield Issues

Inmet, the Toronto-based developer of the $6.2 billion CobrePanama copper mine, increased its debut offering by 50 percent to$1.5 billion, the largest high-yield offering of the week. The 8.75percent, eight-year bonds priced to yield 763 basis points morethan similar-maturity Treasuries, the data show.

Apollo Global Management LLC's Momentive Performance MaterialsInc. sold $250 million of 8.5-year bonds at a spread of 868 basispoints, the data show. The silicone manufacturer reduced the saleafter raising the coupon to 10 percent from the 9.25 percent aperson with knowledge of the issue said. It had previously offeredas much as $500 million, according to the person, who declined tobe identified because the marketing was private.

Select Medical Corp. pulled a $365 million high-yield, high-riskoffering of eight-year notes, the Mechanicsburg, Pennsylvania-basedhospital operator said in a May 14 statement.

The company, which had planned to redeem its $345 million of7.625 percent notes due February 2015 with proceeds, was looking“to opportunistically refinance its indebtedness and elected not tomove ahead with the refinancing due to the rates currentlyavailable for the new debt,” according to the statement.

Select Medical is rated B1 by Moody's and B+ at S&P.

“Larger macro and geopolitical concerns are again pushing to thefore,” Marrinan said. “In such circumstances, issuers will wait fora 'risk on' window to open, hoping to get their deals done beforethe window closes on the next bad headline.”

Bloomberg News

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